Site Mobile Navigation

States Move to Revoke Charities’ Tax Exemptions

Mayor Luke Ravenstahl of Pittsburgh considered a tax on college tuition.Credit
Jeff Swensen for The New York Times

Faced with steep declines in tax revenue, an increasing number of states and localities are considering eliminating various tax exemptions for nonprofit groups.

A bill before the Hawaii Legislature, for instance, would require charities to pay a 1 percent tax, and Kansas is considering making them subject to sales taxes.

Revoking the nonprofit organizations’ exemptions from property taxes is also under scrutiny in several counties in Kansas, as well as in Pennsylvania.

And last fall, Minneapolis made charities subject to the fees it charges businesses and residents for streetlights in hope of gaining an additional $155,000, an exercise Jon Pratt, executive director of the Minnesota Council of Nonprofits, describes as “looking under the sofa cushions.”

In most cases, churches would be exempt from the tax measures, but all other nonprofit groups, including private schools and colleges, would be affected.

“We’re having to look at the public services nonprofits use and how we can adequately cover those costs,” said Matt Greller, executive director of the Indiana Association of Cities and Towns. “We can’t give them away for free any longer.”

Nonprofit groups say the moves to wring revenue out of them are shortsighted and will produce cutbacks in critical services that governments rely on them to provide, like mental health and emergency foster care services.

“Nonprofits are really hurting in this economy,” said Tim Delaney, chief executive of the National Council of Nonprofits, a trade association. “Their revenues are down, too, and demand for the services they provide, services that government expects them to provide, is way up.”

State and local governments have tried rolling back various nonprofit tax exemptions in the past, with limited success. Some localities have negotiated “payments in lieu of taxes” from some nonprofit groups. Harvard, for example, paid the City of Cambridge $2.2 million in 2008, as well as $5.2 million for water and sewer service, though such arrangements are typically temporary and subject to negotiation.

But exemptions from property, sales and other taxes have largely remained sacrosanct — until now.

“Our members are beyond upset, they’re fearful,” said Diana Aviv, chief executive of the Independent Sector, a nonprofit trade group. “They know that state elected officials are short of cash and are looking for every opportunity — and, frankly, excuse — to raid pots of money to pay for other pressing needs.”

Ms. Aviv and other charity leaders contend that charities are already helping government defray costs because so many states and localities are long past due on payments owed to nonprofit groups for services that governments used to provide.

“We’re effectively providing interest-free loans to state governments, which have been very slow to pay what they owe us, and now they’re asking us to pay more,” said Lisa Maruyama, chief executive of the Hawaii Alliance of Nonprofit Organizations.

Hawaii is considering suspending a wide range of exemptions from the general excise tax, including the one held by nonprofit organizations. Additionally, the Honolulu City Council is talking about increasing the property tax on the groups, which is currently capped at $100 a year.

Calvin K. Y. Say, the speaker of the Hawaii House of Representatives and a supporter of revoking exemptions, emphasized that he was not singling out nonprofit groups.

“They would be one of many others that would lose various exemptions,” Mr. Say said. “Repealing exemptions spreads the pain more evenly than raising the rate paid by those already subject to excise taxes.”

He said his proposal could raise $500 million to $750 million, which would help close a budget shortfall of $1.2 billion as of January. “I’ve tried this before, and I’ve always gotten criticism for it,” Mr. Say said. “But in this environment today, all options are being considered much more seriously.”

Mr. Greller, of the Indiana Association of Cities and Towns, said mayors and other elected officials have to consider all their options. A proposal to cap the amount of property taxes paid by Indiana residents is on the ballot in November, and if it passes, local government revenues across the state will fall by hundreds of millions of dollars, he said.

Indiana’s localities are considering user fees for things like police and fire services that would affect large, wealthy nonprofit organizations like universities and hospitals the most. Already, Ball State University pays a small fee to the City of Muncie for fire protection, and Indiana University pays a similar fee to Bloomington, Mr. Greller said.

He said that in the majority of Indiana’s localities, at least half of the property is tax-exempt because it is owned by a charity.

The increasing amount of property owned by the University of Pittsburgh’s medical center and other nonprofit groups in Pittsburgh and elsewhere prompted State Senator Wayne D. Fontana to propose legislation that would impose an “essential services” fee on charities, based on the amount of property they own.

“In Pittsburgh and Allegheny County, we have a lot of nonprofits continually buying up real estate and expanding and getting bigger and bigger,” Mr. Fontana said. “Each piece of property they buy becomes untaxable, which means everyone else has to pay more in property taxes just to maintain service levels.”

In December, Mayor Luke Ravenstahl of Pittsburgh proposed a 1 percent tax on college tuitions to raise roughly $16 million that would help the city make pension payments. He shelved the plan when three large nonprofit organizations in the city — the University of Pittsburgh, Carnegie Mellon University and Highmark, a health care provider — agreed to make larger voluntary payments.

Michael D. Weekes, chief executive of Providers Council, a trade association representing organizations that provide human services in Massachusetts, said that more and more cities and towns in that state were pressing nonprofit groups to make similar agreements.

“Those may seem less onerous than what other places are considering,” Mr. Weekes said, “but the bottom line is, they still cut into our ability to deliver vital services.”

A version of this article appears in print on February 28, 2010, on page A21 of the New York edition with the headline: States Move to Revoke Charities’ Tax Exemptions. Order Reprints|Today's Paper|Subscribe